In a regulatory notice released Friday, the U.S. Securities and Exchange Commission indicated it will examine changes to Rule 14a-8, the federal rule that sets requirements for shareholder proposals appearing in public companies' annual proxy statements, including a minimum ownership threshold. The notice represents a step toward eliminating the current federal rule and transferring regulatory responsibility over shareholder proposals to state authorities.
A spokesman for SEC Chairman Paul Atkins, responding by e-mail, said Atkins has "highlighted concerns that the SEC’s Rule 14a-8 on shareholder proposals exceeds the Commission’s authority and infringes upon state laws. To that end, the Commission is expected to consider a proposal to rescind the rule and return the role of regulating shareholder proposals to the states."
Investor resolutions on corporate ballots have frequently addressed issues such as carbon emissions and the roles of executives, and have been prominent at many annual meetings. The SEC notice comes despite reports that voter backing for some of those resolutions has declined in recent years.
Advocates who regularly file shareholder proposals warned the proposed shift would create practical confusion because state laws vary. Tim Smith, senior policy adviser at the Interfaith Center on Corporate Responsibility, which represents organizations that often bring these resolutions, said inconsistent state standards would complicate the process for investors.
"Across the investor community there will be a response to the questionable legal arguments he (Atkins) is making about the authority of the SEC," Smith said.
The article's source material notes stark contrasts in state statutes. Under a new law in Republican-controlled Texas, for instance, investors could need as much as $1 million worth of shares to file a resolution, compared with just $2,000 under a current SEC requirement. That disparity highlights the potential for widely divergent access to the shareholder proposal process if authority shifts from the federal to the state level.
Legal advisers and strategists say rescinding Rule 14a-8 could change how shareholders signal disapproval at companies. Broc Romanek, a strategist at the Cooley law firm, suggested that restrictions on shareholder proposals could lead activists and other shareholders to use director votes as an alternative mechanism to express dissatisfaction.
"Votes against directors will be used more and more as other avenues are shut down," Romanek said in a telephone interview.
Separately, the SEC issued a notice proposing to "modernize" the proxy solicitation process, the set of rules that governs how companies and shareholders communicate around corporate votes. The agency's spokesman said the effort aims "to reflect advancement in technology and current realities of shareholder communications." Activist investors have argued that changes to proxy rules could disproportionately limit the ability of small investors to speak out.
The pair of regulatory notices signals the agency's interest in rethinking two key aspects of shareholder engagement: the federal baseline for including proposals in proxy materials and the mechanics of how proxy solicitations occur. The notices stop short of final action but set the stage for a potential rollback of a long-standing federal regime in favor of a patchwork of state-level rules, with attendant uncertainty for investors, boards and corporate governance practices.
How the process unfolds will determine whether states create uniform alternatives or a fragmented system that alters the balance between company management, boards and investors. For now, the SEC has opened a formal path to consider rescinding Rule 14a-8 and to update proxy solicitation rules, prompting immediate reaction from investor groups and legal advisers.